Economics of the Nonprofit Sector Introduction Introduction • Syllabus • Class format Key topics: • Funding mechanisms employed by nonprofits/charitable organizations • The relationship that exists between the government sector and the Nonprofit Sector • Details of the organizational characteristics of effective and ineffective charitable organizations • New forms of philanthropic organizations • The implications of agency problems and possible solution • Comprehensive analysis of how charitable organizations are assessed Funding of Nonprofits • Four major sources of funds and funding • • • • Individual Corporate Foundations Bequests • Altruism(?) • Donor control – do donors get what they want? What Motivates Giving • Individuals: – Altruism – Social Stature – Warm-glow • Businesses: – Altruism of Managers – Profit Motive • Foundations – Altruism – Social Goals Discussion • Should donations be tax-deductible? Looking Towards Meeting #2 • Familiarize yourself with Blackbaud Index, the Chronicle of Philanthropy, Giving in Numbers • These are major sources of data on charitable giving and philanthropy • Read Ott & Dicke, Chapters 10, 13 and 22. • Read Van Slyke and Brooks piece and McClelland and Brooks • Student Presenters: Meeting 2 Ott & Dicke – Chapter 10, The Fundraising Process (Lindahl) Planning for fundraising: SWOT analysis: Strengths, Weaknesses, Opportunities, Threats Analysis of a well-known local charity Based on SWOT outcome, setting of goals Operating, endowment, capital (facilities) Establishing an Action Plan Including cultivation and solicitations Cultivation of long-term donors Evaluation of Fundraising • Steps • Achievement of goals within certain constraints • Achieved within a reasonable time • Frugality – were goals achieved without spending large proportion of raised funds to conduct campaign • Don’t want to end up on this list: Worst Charities Rank Charity name Total raised by solicitors Paid to solicitors % spent on direct cash aid 1 Kids Wish Network $137.9 million $115.9 million 2.5% 2 Cancer Fund of America $86.8 million $75.4 million 1.0% 3 Children's Wish Foundation International $92.7 million $61.2 million 10.6% 4 Firefighters Charitable Foundation $62.8 million $53.8 million 7.4% 5 International Union of Police Associations, AFL-CIO $66.6 million $50.4 million 0.5% 6 Breast Cancer Relief Foundation $63.9 million $44.8 million 2.2% 7 American Association of $48.1 million State Troopers $38.6 million 8.9% $36.9 million 7.8% $34.4 million 4.6% $28.9 million 0.7% 8 9 10 National Veterans $70.2 million Service Fund Children's Cancer Fund $43.7 million of America Children's Cancer Recovery Foundation $38.5 million Ott & Dicke, Chapter 13 – Foundations (Boris) Types of Foundations Private foundations A private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy or an object legal in the economic operation. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets.[1] However, most private foundations are much smaller. Approximately twothirds of the more than 84,000 foundations which file with the IRS, in 2008, have less than $1 million in assets, and 93% have less than $10 million in assets.[1] In aggregate, private foundations in the U.S. control over $628 billion in assets[1] and made more than $44 billion in charitable contributions in 2007 -Tax Laws more stringent: Deduction limited to 30% of income Public foundations A public foundation is also called a grantmaking public charity. They raise money from the public (individuals, corporations, and other foundations) to provide grants. The IRS does not consider these as private foundations since their base of support is typically broad. Community foundations are recognized as “public”. Tax Laws less stringent: Donations up to 50% of income Government Foundations • Funded through tax dollars • Fund through grant-making process Foundation Governance • Corporate Governance • Donor • Small Foundations – managed by family and small set of donors • Administrator • Board makes decisions on funds – Administered by small professional staff • Director • Executive Director manages funding process • Presidential Model • Managed primarily by Nonprofits CEO • ? Impact on the administrative costs of nonprofit? Ott & Dicke (Drapkin and Hayden), Chapter 22 • Managing Volunteers • Nonprofit sector typically highly dependent on volunteers • Lowers cost of operation – makes nonprofit expenditures a lower proportion of donations • Authors note the complexity of the volunteering population • ex. Coerced versus free-will • Politically motivated volunteerism • Volunteers are not “free”, as supervision consumes staff time • Ott & Dickey note that increased lifespan produces a larger pool of potential volunteers • Government programs such as AmeriCorps are providing more outlets for volunteering What Does philanthropy mean? • https://www.youtube.com/watch?v=tZ5t8xD7qGU READINGS • 3 of 5 assigned readings are primary data sources for information on nonprofits and charitable giving: • (Reading 2) Blackbaud Index (charitable giving report) • Provides statistics on charitable giving by source, purpose and by method by which it was raised • Major findings are the rapidly rising importance of online giving, along with a trend towards giving towards “international affairs” causes • Blackbaud targeted more towards nonprofits managers, less towards researchers Reading #3 • Chronicle of Philanthropy • Comprehensive data on giving, including corporate giving (key corporate donors) • Includes the Philanthropy 400 – interactive database of organizations • Filtered by cause, location • + information on America’s top donors • Considered the premier source of data Reading #4 • Conference Board, Giving in Numbers • Best source of data on corporate giving • Gives numbers by industry cross-referenced with cause • E.g. what firms in the petroleum industry give to artistic causes • Figures help illuminate corporate goals: • Firms with P.R. problems (tobacco firms) might give to causes that are highly visible and enlightened (the arts) • Firms that need highly trained labor might give to educational causes Further Reading: LeClair, M. and Gordon, K. (2000), “Corporate Support for Artistic and Cultural Activities: What Determines the Composition of Corporate Giving?” Journal of Cultural Economics, 24(3), 2000. Article presentation • Van Slyke and Brooks • “Why do People Give?” A. Point of article is to understand what motivates giving, and how nonprofit managers can use that information 1. Authors note that philanthropy is no longer a private concern – part of civil society 2. Competition among nonprofits for donors’ dollars is increasing 3. And, through the tax code, the public IS paying for part of each nonprofit’s budget 4. Article focuses on which strategies work for which donors B. Page 201 notes that the increasing availability of data means that nonprofit managers have much more information to utilize in setting strategies (e.g. Giving USA) C. Page 202: Factors that correlate with giving • Age, gender, religiosity, income, wealth (difference?), taxes and volunteerism • +Tax Implications – note that if you do not itemize, the tax deduction is of no value • Up to 50% of AGI – anything near this will get you audited! • Authors then apply empirical test to determine what variables best determine giving (Page 308) • >>>brief explanation of regression…… • Results on page 309 indicate that the following are significant: • Income, age, Christian (5%), college-educated, married, nonwhite (5%), civically active, volunteer • Rest are at 1% level • These can become the basis for targeted fund-raising • Authors note that in some cases, the results may simply indicate that potential donors had never been approached. Looking towards next meeting • Class Discussion on Effective Charitable Organizations • Visit Charity Navigator and Charity Watch • Pick one charity that is highly ranked and another that is poorly ranked • Find out why! • Literature assignments: • Bradshaw, P., Hayday, B. and Armstrong, R. (2007), “Nonprofit Governance Models: Problems and Prospects,” Christopher Bernard • Bekkers, R. and Wiepking, P. (2011). “A Literature Review of Empirical Studies of Philanthropy: Eight Mechanisms that Drive Charitable Giving, Chris Cahill • “How to Determine if a Charity is Effective,” online at: http://online.wsj.com/news/articles/SB10001424127887323977304579000433238565 634, Jack Delaney Effective and ineffective nonprofits – Meeting #3 • TOPICS: • Fundraising – methods and effectiveness • Fundraising costs as a percentage of donations (or budget) • Effectiveness of programs • Who benefits in short- and long-run • Management accountability and reporting • Dedication to charter – do nonprofits follow the intentions of their donors (financers)? Case Studies – The Best Charities (source: CS Monitor) PERCENTAG SALARY & PUBLIC E OF TOTAL BENEFITS WISE CHARITYWA SUPPORT IN EXPENSES OF GIVING TCH‡ MILLIONS SPENT ON HIGHESTALLIANCE GRADE (2011) PROGRAMS PAID ‡‡ † OFFICIAL† RANK NAME WEBSITE TOTAL INCOME IN CATEGORY MILLIONS (2011) 1 YMCA of the USA ymca.net Social services $5986.1 $823.4 87.4 $441,438 A MEETS ★★★★ STANDARDS 2 Goodwill Industries International goodwill.org Social services 4,437.0 778.0 89.0‡‡ $508,571 A MEETS NO RATING STANDARDS 3 Catholic Charities USA catholicchari Social ties.usa.org services 4,422.8 679.2 79.6 $265,356 NO RATING MEETS ★★★★ STANDARDS 4 United Way unitedway.or Social g services 4,139.9 3,903.2 90.6 $763,394 NO RATING NO RATING ★★★★ 5 American Red Social redcross.org Cross services 3,453.0 945.9 92.2 $568,594 A MEETS ★★★ STANDARDS 6 The Salvation Army 3,203.8 1,697.6 84.0 $216,182 A / A– MEETS NO RATING STANDARDS salvationarm Social yusa.org services CHARITY NAVIGATOR † Examination of American Red Cross • • • • • • • • • Website includes state goals and pricinples +Governance Documents Committees: Audit and Risk Management Committee Quality and Regulatory Compliance Subcommittee Board of Trustees of the Endowment Fund Compensation and Management Development Committee Executive Committee Governance and Board Development Committee • Posted Ethical Rules by which the organization is run • Strict guidelines and oversight have protected the organization from scandal • 92.2% of raised funds go to programs • Volunteers used extensively to keep costs down • Auditing process includes external oversight The Bad – Angel Food Ministries • Georgia-based nonprofit that used donations to buy food at wholesale and sell it to the needy at bargain prices • Operated out of numerous churches • At pinnacle, Angel Food was providing discounted food to 500,000 families • Problem: Cash-based business with poor accountability • Also: Run entirely by close circle of family members with no external auditing process • Cash was siphoned off to purchase cars, real estate and even a private jet. • Raided by FBI in 2011 – had received substantial federal funding ($7 million), so federal government got involved. • Ultimately led to jail time for those involved • Most unfortunate part was loss of service to ½ million beneficiaries • Other very bad nonprofits: • Foundation for New Philanthropy (Ponzi scheme) • United States Navy Veterans Association – Collected $100 million dollars over 10 years – no charitable activity of any kind Readings for the week • Ott & Dickey (Eadie): Chapter 2 – Governance Models • Boards may be high impact or at arms length • Meddlesome or arms length • Authors note (page 20) that boards of small organizations may find it difficult to separate themselves from day-to-day operations of the entity, instead of providing oversight. • Ideally, boards should provide oversight on: • Strategic questions • Operational questions • Accountability questions – is the organizational accountable to its stakeholders and the broader public Four “Streams” of governance identified by eadie • Board self-management (who serves and what is expected of them) • Planning stream: strategic goals, annual budgets • Performance oversight and monitoring stream • External stakeholder stream – How to communicate with donors and the community high impact board • High-stakes issues are addressed fully and in a timely fashion • Board members (not bored members) are fully invested in the success of the enterprise • Board members work effectively with CEO of organization The “old” model – The passivereactive board • Board stays out of decision-making process (allows wide leeway to CEO) until crisis • Then reacts to problem rather than providing leadership • CEO now views board action as interference – defensive posture inevitable • If CEO and Board are in partnership, this is avoided. The high-impact board • Requires: • Strong mission statement to provide guidance • Standing committees so the board’s work does not take place 4 days out of the year. Class exercise • Samaritan’s Purse v. Wishing Well Foundation • Address four issues in group: • • • • Overall and categorical rating of each Effectiveness Governance model Malfeasance – is nonprofit doing anything under-handed? clue: answer for one of these is “yes” Ott & Dickey, Chapter 3 (American Bar Association) • Author provides look at impact of Sarbanes-Oxley on nonprofits • 10 General principles off corporate governance: • Role of the Board – should provide oversight that ensures effective and ethical management • Importance of Independent Directors – Directors should not be subservient to management, as is frequently the case when nominated and appointed by management • Need for an Audit Committee – lack of independent auditing and cross-checking of finances a major source of problems • Existence of a nominating committee for the Board • Compensation Committee: Independent directors that examine pay and compensation issues • Should have intervened in United Way scandal • Complete and accurate disclosure of the financials of the nonprofit • Appropriate business conduct and ethics codes in place • Executive compensation should reflect responsibilities and backgrounds of executive - problems arise when Board members are appointed by executives and OK excess compensation • Procedures should be in place to receive and respond to complaints (ethical, financial) • Document retention rules should be in place – rules should lay out when documents may be destroyed Looking towards Next week • Begin look at effective fundraising, including new forms of securing donations • e.g. Crowd-funding • First cover chapters 10-12 as background (O&D) • Then, each group will design an on-line fundraising for a designated charity • I will be handing out assignments • Work will be presented next week Meeting #4 – Designing an effective fundraising model • O&D, Chapter 10 (Lindahl): • The Fundraising Process • Chapter emphasizes research on process, prospects, etc. • Also, fully understanding one’s own organization, so its goals, etc. can be explained to potential donors • Lindahl, Page 119 – goal-setting • Facilities, Endowment and Operating • Some donors may be much more responsive to one type of donation (e.g. some may only give to facilities improvement) • Steps: • Cultivation • Fairfield example • Solicitation • Types of solicitations: • Planned giving • Major gift solicitations • Role of Stewardship: • Possible alternative goals of managers • Self-interest, social status • Good stewardship requires goals of nonprofit are paramount • Lindahl (page 124) note that a ex post evaluation of how well the fundraising worked is critical • O&D, Chapter 11 (Pratt) – Analyzing the Dynamics of Funding • Key focus of chapter is on the reliability of fund-raising and the degree to which the funding binds the hand of the nonprofit • Reliability: • High: Individual donors, endowments, memberships, rental income, advertising • Medium: fees for services, continuing government contracts, corporate charitable contributions • Low: Government grants that are project-driven, foundation grants, corporate sponsorships • Autonomy: • High: small- to medium-sized individual contributions, foundations, fees for service, endowments, memberships • Medium: large individual contributions, corporate contributions • Low: project grants, government contracts, United Way support • Pages 130-31 – Eight forms of funding and resulting reliability and autonomy • Discussion – particularly the issue of government-funded nonprofits Giving Circles and “crowdfunding” • What happens when charity becomes a social act? • Chapter12 focuses on giving circles: • Groups that pool resources to leverage donations • Eikenberry notes that these groups are educational in nature, and that giving becomes part a member’s social life • Giving can be more informed and members can find new ways to engage with issues they are interested in • Forms: • Page 136 – Organizational form • Most operate on a “fee” basis (which funds donations) • Large donation groups typically have a more formalized grant-making procedure • Some are formal groups that meet, some are loose networks Eikenberry Provide 2 case studies • Shared Giving: Small (16 members) group that focuses on leveraging individual donations • Started by couple that realized they were giving away a lot of money, but randomly and in small amounts • Decided to increase the impact of giving by organizing and targeting contributions • Womenade: 38 giving circles under this name. Join for a small fee ($35) – Money used to provide small donations to women (families) experiencing financial stress • Such as paying an over-due utility bill Benefits of giving circles • Charity as a way of life • Giving is consistent and targeted • More informed! • Social aspect encourages participation • List of Giving Circles can be found at: http://www.givingcircles.org/ Crowdfunding • Means by which to draw in many donors at a very small price per donor. • Cause and monetary goal posted on the web • Rely upon social contacts to encourage participation • Top ten sites can be found at: http://www.crowdfunding.com/ Example: Kickstarter – seeks individual donations to fund creative work that otherwise would not be funded (e.g. cinema) • Crowdfunding also used to fund medical treatment for those with serious long-term illnesses who are in financial stress • Avoids costs of approaching donors, but visibility is an issue Literature for Next Time • 9. • 10. Heutel, Garth (2014). “Crowding Out and Crowding In of Private Donations and Government Grants,” Public Finance Review 42, 143-75. (Christina Howell) Brokaw, L. (2012, November 28). “The ‘Benefit Corporation’ Movement,” MIT Sloan Management Review. Retrieved from http://sloanreview.mot.edu/artucle/the-benefit-corporation-movement/ (Julie Labbadia) Class Exercise • Donation effectiveness • Design a website that: • • • • • • • • • Promotes Cause Will be easily found by those searching Details finances of nonprofit Provides searchable statistics (why?) Stories of assistance Mission statement History Media resources Major Donors (why might you want to omit this?) Web design session Handout Meeting #5 • Return to Meeting #4 of Syllabus • Ott/Dicke 28, Journal Readings 8/9 Presentations (Tom and Patrick) • “How to Determine if a Charity is Effective,” online at: http://online.wsj.com/news/articles/SB100014241278873239773 04579000433238565634 • Heutel, Garth (2014). “Crowding Out and Crowding In of Private Donations and Government Grants,” Public Finance Review 42, 143-75. The Economic Impact of the Nonprofit Sector • Magnitude of donations and where they go • Plus, further insights on crowding out/crowding in • Data on total giving: Total Giving by Source and as a Percentage of Total Giving, U.S., 1990-2012, Billions of Dollars Year Corporations Percent Foundations Percent Bequests Percent Individuals Percent 1990 5.46 5.54% 7.23 7.34% 6.79 6.89% 79.00 80.22% 1991 5.25 5.11 7.72 7.53 7.68 7.49 81.93 79.87 1992 5.91 5.31 8.64 7.76 9.54 8.57 87.20 78.35 1993 6.47 5.55 9.53 8.17 8.86 7.60 91.72 78.68 1994 6.98 5.81 9.66 8.05 11.13 9.27 92.28 76.87 1995 7.35 5.97 10.56 8.58 10.41 8.46 94.78 77.00 1996 7.51 5.41 12.00 8.64 12.03 8.66 107.35 77.29 1997 8.62 5.31 13.92 8.57 16.25 10.17 123.67 76.12 1998 8.46 4.79 17.01 9.63 13.41 7.60 137.68 77.98 1999 10.23 5.03 20.51 10.09 17.82 8.77 154.63 76.10 2000 10.74 4.68 24.58 10.70 20.25 8.82 174.09 75.80 2001 11.66 5.02 27.22 11.73 20.15 8.68 173.06 74.57 2002 10.79 4.64 26.98 11.59 21.16 9.09 173.79 74.68 2003 11.06 4.66 26.84 11.30 18.08 7.61 181.47 76.42 2004 11.36 4.36 28.41 10.92 18.53 7.12 201.96 77.60 2005 15.20 5.20 32.41 11.08 24.00 8.21 220.82 75.51 2006 14.52 4.90 34.91 11.79 21.90 7.40 224.76 75.91 2007 14.22 4.57 40.00 12.86 23.79 7.65 233.05 74.92 2008 12.40 4.14 42.21 14.09 31.24 10.43 213.76 71.35 2009 13.79 5.03 41.09 14.98 19.12 6.97 200.37 73.03 2010 15.82 5.40 40.95 13.97 22.97 7.84 213.30 72.79 2011 16.18 5.30 43.83 14.35 25.18 8.24 220.26 72.11 2012 18.15 5.74 45.74 14.46 23.41 7.40 228.93 72.39 Source: Derived from Lilly Family School of Philanthropy, Giving USA Total Giving by Type of Recipient, U.S., 1990-2012, Billions of Dollars and as a Percentage of Total Year Religion Percent Education Percent Human Serv. Percent Health Percent 2000 76.95 33.51 28.81 12.54 20.79 9.05 15.30 6.66 2001 79.87 34.41 28.07 12.09 24.28 10.46 16.41 7.07 2002 82.98 35.66 27.25 11.71 22.71 9.76 15.70 6.75 2003 84.12 35.43 29.59 12.46 23.49 9.89 17.78 7.49 2004 87.51 33.62 31.66 12.16 26.10 10.02 19.06 7.32 2005 90.86 31.07 34.99 11.97 30.35 10.38 20.33 6.95 2006 94.63 31.96 40.07 13.53 30.74 10.38 24.22 8.18 2007 97.79 31.44 42.69 13.72 31.45 10.11 25.28 8.13 2008 98.22 32.78 35.89 11.98 35.44 11.83 24.14 8.06 2009 99.56 36.29 34.96 12.74 35.95 13.10 26.08 9.51 2010 97.54 33.29 37.32 12.74 38.25 13.06 26.64 9.09 2011 101.78 33.32 38.62 12.64 38.91 12.74 26.80 8.77 2012 101.54 32.11 41.33 13.07 40.40 12.74 28.12 8.89 Year Public Society Percent Arts/Culture Percent 2000 International Affairs Percent 15.00 6.53 10.56 4.60 6.28 2.73 2001 16.56 7.14 9.73 4.19 6.68 2.88 2002 14.22 6.11 9.93 4.27 7.97 2.00 2003 15.96 6.72 11.11 4.68 9.44 3.98 2004 17.66 6.79 11.23 4.31 11.52 4.43 2005 20.76 7.10 12.43 4.25 12.71 4.35 2006 23.16 7.82 13.92 4.57 13.51 4.56 2007 19.99 6.43 14.92 4.80 15.78 5.07 2008 17.95 5.99 12.29 4.10 20.57 6.87 2009 17.31 6.31 12.59 4.59 16.39 5.07 2010 19.43 6.63 13.02 4.44 17.05 5.82 2011 20.52 6.72 13.39 4.38 18.65 6.11 2012 21.63 6.84 14.44 4.57 19.11 6.04 Individual Giving, Average and in Proportion to Income, 2011 Income (range) Income (average) Donations (average) Donations/Income Less than $70,000 $31,842 $1,054 0.033 $70,000-79,999 $74,742 $2,019 0.027 $80,000-99,999 $89,108 $2,099 0.024 $100,000-119,000 $108,549 $2,179 0.020 $120,000-149,999 $133,318 $3,242 0.024 $150,000 and Over $247,261 $6,059 0.025 Source: Bureau of Labor Statistics, Consumer Expenditure Survey Examples of giving by State Average Individual Giving, Total ($billions), and as a Percentage of AGI, by State, 2010 State Charitable Contributions Average/Itemizer % of AGI $2,832.0 B $4,738 2.9 316.8 3,355 1.5 Arizona 2,726.4 2,959 1.9 Arkansas 1,336.2 4,407 2.3 California 21,297.0 3,515 2.1 Colorado 3,050.9 3,355 2.1 Connecticut 2,981.1 3,937 2.0 Delaware 466.6 3,035 2.0 District of Columbia 667.1 5,210 2.8 Florida 9,279.6 3,792 2.0 Georgia 6,302.1 3,929 2.9 Hawaii 554.0 2,682 1.7 Idaho 799.5 3,648 2.7 6,923.4 3,340 1.9 Alabama Alaska Illinois Table 3.2 Central Government and Private Expenditures on Social Policy, % of GDP, Selected Countries Country Private Public Switzerland 1.0% 18.4% Australia 3.1 17.8 17.4 Canada 5.1 19.2 26.6 Norway 2.3 23.3 9.9 Greece 1.8 23.9 7.5 Ireland 2.2 23.6 9.3 Japan 4.0 22.4 17.9 Spain 0.5 26.0 1.9 Portugal 1.9 25.6 7.4 10.6 19.2 55.2 Netherlands 6.7 23.2 28.9 Italy 2.3 27.8 8.3 Finland 1.2 29.4 4.1 Germany 3.2 27.8 11.5 Austria 2.1 29.1 7.2 Belgium 2.3 29.7 7.7 Sweden 3.2 29.8 10.7 Denmark 2.9 30.2 9.6 France 3.1 32.1 9.7 United States Private as % of Public 5.4% Source: Organization for Economic Cooperation and Development, Social Expenditure Database Table 3.5 Regression Results, Estimation with Embedded Binary Variables Variable Intercept Coefficient z-score -1.74 -0.63 Gross Domestic Product 0.22 11.52 Tax Burden 2.88 0.77 -.074 -9.89 Size of Government 6.75 1.38 Growth in GDP 2.25 0.84 Binary (U.S.) 1.22E11 10.79 Binary (U.K.) -2.75E10 -4.48 Binary (Japan) -1.19E10 -3.35 Social Spending Wald X2 = 29,402 Overall R-Square = 0.997 ____________________________________________________________________________ Source: LeClair, M., and Watts, A. (2013). “Charitable Contributions, Government Spending, and Crowding Out: A Cross-National Analysis.” Paper presented at the annual meeting of Northeast Business and Economics Association. Bretton-Woods, New Hampshire. Assessing the Role of the Nonprofit Sector • Chapter 14 (Young) – Nonprofit Entrepreneurship: • Innovation in the way a nonprofit raises money or pursues its cause • Traditional model: New methods of fundraising, new causes • Less traditional model: Web-based philanthropy (crowd-funding, etc.) • This has, of course, also led to some malfeasance (fundraising that seems too good to be true) • Or, Innovation in causes • Authors note that 57% of all nonprofits have come into existence in the last 20 years • Entrepreneurship is alive and well • Motivators: • Increased prestige and income • Deep devotion to an idea or cause (e.g. religious causes) • Young (page 167) notes that commercial operations frequently become part of a nonprofits operations (logo-items) American Cancer Society Formulas for success • Page 168 • Eisenberg’s 1986 piece: • Ten characteristics of a successful style of management at a nonprofit • • • • • • • • • • Coherent aims and values Focus on comparative advantage Innovative decision-making Adaptive environment Excellence of execution Staying power Marshalling talent Finesse with diverse constituencies Knowledge of “where the action is” Active-positive leadership • Also present the list of abilities put forth by Young (1985, 1991) • Many are appropriate for entrepreneurship in general, not just nonprofits • Chapter 17 – “Commercialization of nonprofits” • Predicted by Hansmann (1989) • Philanthropic sector would divide into two distinct components • Traditional nonprofits • Commercial nonprofits that sell a product in order to conduct business • Hospitals, universities, nursing homes, daycare centers • Commercialization has actually been much broader – gives example of PBS marketing content (e.g. Sesame Street) • Case Study of Metropolitan Museum of Art – operating revenue • Traditional sources of revenues for nonprofits: Fees (museums, concerts), grants, endowments, gifts • Auxiliary: Merchandising • As noted on page 194, merchandising was briefly very important, but has declined to a minor source of revenue • But, on page 195 – Total figures instead of Net • Merchandising far more important • Presents a puzzle – sales add a good deal to revenue, but little to net revenue • May be viewing merchandising mostly as another form of advertising • Table 7.3 is perhaps most important: • Admissions and endowments are the only two sources of revenue that are really growing • Troubling, since admissions are hard to raise, placing the burden on increasing endowment • Museums are somewhat unique. Picture at a nonprofit hospital would be quite different Literature Assignments for Next Time • O&D 14, 17 Brokaw, L. (2012, November 28). “The ‘Benefit Corporation’ Movement,” MIT Sloan Management Review. Retrieved from http://sloanreview.mot.edu/artucle/the-benefit-corporationmovement/ Crane, A. (2001). “Unpacking the Ethical Product,” Journal of Business Ethics 30, 361-73. Kannon, S., “Could Impact Investing Help India’s Poor?” BBC News (Dehli), September 29, 2011. Looking Towards Meeting Meeting #6 • Philanthropic Models that involve purchasing a product and simultaneously making a contribution to a cause • Or, investing and making a contribution • Class Project (2nd ½ of class): • Design a product that will be sold to the general public that also contains a contribution to a cause • Carefully consider pricing and packaging • How are cause and product related? • How will you convey that to consumers • Example: Fair Trade What is Fair Trade all About? • Origins: • Edna Ruth Byler of the Mennonite Church frequently credited with starting the Fair Trade movement • Returned from a visit to Puerto Rico deeply concerned about the plight of workers • Began selling handicrafts out of the trunk of her car • Increased proceeds enabled her to pay handicraft producers higher prices for their products • The Mennonite efforts eventually led to the establishment of Ten Thousand Villages, most common retail example of Fair Trade in the U.S. Intended Message Apparent in Packaging What does Fair Trade Cover? • List of products that are sold through Fair Trade Channels include: • Commodities: Coffee, cocoa, chocolate, tea, honey, beans, seafood, fruits, spices and vegetables • Other: Handicrafts, apparel, wine • List of Products available at Fair Trade USA How it works • Fair Trade products require certification • Largest body is the Fairtrade Labeling Organization (FLO) • Extensive set of criteria, including workers pay, production methods, environmental standards, etc. • Workers form a coop and work with FLO to achieve these standards • Products are then FLO-certified Fair Trade After a cooperative if formed • Coops contact a Fair Trade distributor: • Oxfam, Equal Exchange, Ten Thousand Villages • Distribution takes place through these organizations • Workers receive a higher than market price for their products, frequently with an established “floor” to eliminate the dips in commodity prices • Sometimes greater returns are distributed in-kind (medical, educational services) • Smaller producers may sell online only • Fair Trade is certainly a form of philanthropy – Is it charity? Other models of giving-throughbuying • This type of fund-raising is now pervasive in retailing • e.g. Buy X and a $1 will be donated to breast cancer research • Difficult to unravel whether product is bought because of the donation or just because the consumer wanted the product • Buyer knows very little about where $ is actually going. • Raises (once again) the Principle-Agent Problem • What is double bottom-line accounting More formalized approaches • Benefits Corporation model • For-profit firm that also pursues a social goal • Examples • Agricultural businesses that support sustainability and land reclamation • Or support the nearby food movement (Epiphany Farms) • Commodity Sellers that support the well-being of growers (Moyee Coffee) • Can find an extensive list of CERTIFIED B Corps at bcorporation.net • Benefits corporations approved in 22 states and DC. • Legislation important, since firms are technically violating their fiduciary responsibility to stockholders (not maximizing profits) Group exercise on Social market enterprises • Design an SME – domestic or international – and determine how the organization creates “public good”